What are the effects of large emerging countries like China and India on the world economy? Essay

The world economy is an exciting topic. The collapse of the centrally planned economies, the oil crisis, the Great Depression in the 1930s, the failure of Latin America in the lost decade of the 1980s and the success of the Asian ‘tigers’ in spite of the temporary financial disturbance in 1997/98—these are all fascinating issues. The world economy is becoming more global. The segmentation of markets is being reduced; new regions, which have until recently scarcely been involved in world trade, are pushing into the international division of labor.

The reader will be familiarized with the most important variables of the world economy, notably world product and its composition from the production and the expenditure side as well as its regional structure. The world economy is in a process of continuous change. Thus, the emerging countries have succeeded in becoming much more integrated into the international division of labor. Meanwhile some of them have reached remarkable places in the ranking of competitiveness.

For these and other problems we have to take a global view, as if the world is being analyzed from outer space. Main Body Since 1970 the developing and emerging countries countries as a whole have succeeded in integrating themselves into the international division of labor. Their contribution to world trade has grown from 18 percent in 1975 to 29 percent in 1997. Especially the emerging countries of Asia on the Pacific rim managed to realize high gains. They significantly increased the share of industry products in their exports, e. . Singapore from 34 percent (1965) to 84 percent (1996). The world market share of the four ‘tigers’ (Hong Kong, Singapore, South Korea and Taiwan) grew from approximately 3 percent in 1975 to approximately 10 percent in 1997. In comparison, the African continent south of the Sahara, with a world market share below 2 percent, remains the poorhouse of the world for the time being. Asia’s economic miracle, so fashionable to discuss and cite as a success story, leaves something to be desired.

To be sure, economic growth has flowed down from Japan to Hong Kong, Singapore, Taiwan, and South Korea, then to Malaysia and Indonesia, and will ultimately flow to China and Vietnam. In a sense, the experience is similar to that in Europe and the United States, but much faster. It took the United States more than half a century, beginning in 1840, to double per capita output. China, on the other hand, has managed to so in a decade after 1978 (Kortum, and Lerner 1997: 24). Of course, Asian progress and economic growth are visible.

Urban development, consumer products, and services appear to be sprouting all over the Asian landscape. It is, nevertheless, important to keep Asian development and progress in proper perspective. After all, China’s Gross Domestic Product (GDP) is probably about one-half of Great Britain’s in 1995. In fact, Great Britain’s GDP is probably larger than those of Hong Kong, Thailand, Malaysia, Indonesia, Singapore, the Philippines, and India combined. According to estimates provided by the International Monetary Fund (IMF), Asia in the 1990s is simply reestablishing the 30 percent of world output it held in 1900.

If Asian economic growth rates of the 1990s continue, then Asian economies may be larger than those of America and Europe by about 2020, assuming that population growth in Asia does not overtake favorable economic developments. The new conditions of the international economy determine a process of growing diversification in the Third World, largely conditioned by the capacity of each developing country to reach a certain level of technological development, without which it would be unable to compete in world markets for manufacturing goods.

It will become increasingly difficult for countries that fail to reach this level to obtain the hard currency necessary to import the capital goods and know-how critical to their development process. A few countries in the Third World have been able to achieve the required technological capacity after competing in the world economy for at least two decades, mainly on the basis of lower production costs in traditional manufacturing.

But the large majority of Third World countries do not have the potential to attain a significant level of technological upgrading by them; hence they seem destined to lag increasingly behind the OECD countries and their new economic partners, the newly industrializing countries. In addition, some very large countries, such as India and China, may be able to use their resources and market potential to reach some level of development as subordinate elements of the dynamic pole of the world economy.

Overall, these processes spell the end of the Third World as an economic, social, cultural, or even political entity, if it ever existed. The newly emerging countries (mainly the four Asian “tigers,” plus Brazil, Mexico, and perhaps Malaysia) have shown that a dynamic integration in a subordinate position in the world capitalist economy can lead to substantial development, even though (in the case of Brazil and Mexico) high rates of economic growth and increased economic competitiveness go together with substantial social inequality and uneven regional development.

Furthermore, the four Asian countries and Brazil (and, to a lesser extent, Mexico) have responded to the technological challenge by improving their educational systems and creating a national basis for high-technology industries. Thus, these countries are now clearly part of the dynamic pole of the world economy, in spite of the gigantic social and political problems still confronting them. But the saga of the successful newly industrialized countries (NICs) is an exception, rather than the rule, in the process of development.

Policymakers must resist the temptation to use these NICs as role models for other Third World countries, forgetting the historical specificity of the NIC development processes. Three factors were crucial to the unprecedented growth of the four Asian NICs(Wong, 1995:87-88): 1. Greatly inspired by the Japanese model, the state deliberately intervened in the development process, guiding the economy and providing key elements of economic and social infrastructure. (Contrary to popular mythology, state intervention was significant even in “free-market” Hong Kong. Certain structural reforms, such as the agrarian reform in Korea and Taiwan and the urban reforms in Hong Kong and Singapore, established the preconditions for successful development. 2. Each nation’s developmental effort coincided with a period of rapid world economic expansion and internationalization. 3. Certain geopolitical conditions made possible easy access to key markets in the United States and Great Britain, and substantial economic aid became available in the early stages of the development process. Together, these three factors established the necessary conditions for economic growth.

Their combination is historically specific and cannot be easily replicated. Even Brazil and Mexico— both of which have achieved a substantial level of industrialization (they are in fact respectively the eighth and tenth largest industrial economies in the West)—have followed a different development process. The China and Korea face the current technological challenge from a position whereby they must enhance their competitiveness in order to survive; in addition, they have the potential to obtain technology transfer and to promote a process of endogenous technological development.

The flexibility of their new industrial structures makes possible a rapid adaptation to new technological conditions. Such is not the situation for the majority of developing countries, however. Many of these are mere consumers of the technological revolution, inasmuch as they mainly purchase military hardware and consumer goods for their small middle classes. Most are simply bypassed by the process of technological change, although they also suffer the consequences of the techno-economic restructuring of the world system through the relative downgrading of their competitive capacities.

Practically all of Africa, most of the Caribbean and Central American nations, and several of the Latin American nations, such as Colombia and Peru, find themselves in this situation. China, India, maybe Indonesia—and Brazil and Mexico to the extent have substantial scientific and technical potential, which is concentrated in the military and in the bureaucracy; yet most of their industries are not internationally competitive because of their technological backwardness. On the other hand, because of their large size, these countries represent major potential markets for the future.

Thus, they have a strong bargaining position from which to obtain technology transfer from multinational corporations and foreign governments in exchange for market access. These countries, if they continue to link up with the world economy on the basis of strong government guidance, could well combine an export-oriented strategy with the growth of their domestic markets, while reaching some level of technological development—in close interaction with the major technology holders of the world (Dornbusch, Fischer and Samuelson, 1977, 1980).

If those countries fail in this complex strategy of using their international bargaining power to develop their own economies on the basis of their domestic markets, they will join the majority of developing countries, that is, they will be increasingly marginalized and disarticulated by the new dynamism of the world economy. They will have little role to play, except in the geopolitical strategies of the superpowers.

Most of the developing countries will be negligible as markets and unnecessary as providers of products, which in turn will become increasingly obsolete in the face of more technologically advanced forms of production and consumption. The most immediate victims of the processes of automation and reinforcement of market connections in the core countries will be the would-be second-tier Asian countries.

The entry of these countries into international markets for manufactured goods will be limited by the enhanced standards of quality and the cheapening of the production process in core advanced economies, including the first tier Asian countries. The growing gap between a large number of developing countries and the core economies will lead, in many instances, to what we might call the “perverse connection”—namely, the use of these impoverished countries as production and distribution centers for drugs, smuggling, and money laundering. 0 The production of coca and coca paste in Peru and Bolivia, the processing and distribution of cocaine in Colombia, the money laundering in Panama and Bahamas, the smuggling economy in Paraguay—all are examples of substantial shares of national economies that create a new form of economic dependency, supplying the dominant economies with goods in high demand, thus restructuring their own societies to adapt to such demand as a last resort to survival.

The new international economy, dominated by the control of capital flows and technological know-how, not only restructures the Third World but, in fact, causes it to disappear as a meaningful unit. But it also unleashes new processes of dominance and dependency that pull apart developing countries, while establishing their segmented connection to different regions of the core economies according to the needs of such regions and to the distinctive possibilities of each developing country. The only alternative to such dependency appears to be lonely starvation in a world that has become an asymmetrically interdependent entity.

In many respects, the East Asian economy is Schumpeterian, characterized by dynamic increasing returns. These increasing returns offer a powerful non-neoclassical case for gains to a developing country from participating in the global economy. Beyond the usual (neoclassical) gains from trade due to comparative advantage, in the Schumpeterian system, international integration increases the benefits from innovation. “The newest theoretical models predict a positive role for protectionist measures to guide the development of comparative advantages yielding higher long-run growth trajectories” (Krugman, 1994: 45)

Technological change can be generated both by technology transfer and by indigenous efforts to assimilate and improve imported technologies. In this system, exports are a very important means of acquiring technological mastery and serve as a direct means of improving productivity. Exports and technology determine not only the industrial structure but also the economic position of a country in the international hierarchy. Technology is assumed to be embodied in both human and physical capital.

In the steady state, exports and technology are substitutes competing for a limited factor endowment of human capital and R and D capital, so that expansion of the former causes the contraction of the latter. The developmental experiences of the East-Asian economies reveal that, in the early stage of development, countries have tended to pursue export expansion ahead of technological change. However, in the dynamic context they are complements. Technology and exports give rise to positive externalities for each other, thus contributing to output growth.

For example, exports stimulate the inflow of more advanced technology, and technological change achieved through this process in turn reinforces export expansion. Output growth, in turn, contributes to the relaxation of the constraint on R and D expenditure. Furthermore, technology and exports have dual sides, as input and output. The government is treated as an external force that influences the market whenever market failure exists. On the other hand, India has veered sharply away from its former command-economy path to pursue market economics. The change has been bumpy but steady.

It is likely to continue, despite misgivings from some quarters and opposition from others, gradually increasing in strength as the benefits of market economics manifest themselves in the real incomes of more and more citizens. Market economics is likely to change India more dramatically than any other economic theory in recent history. The main reason is not so much that more people are becoming more content, but that it is removing their economic fate from the hands of politicians. Economic liberalism means deregulating the economy at home and more investment—and ideas—from abroad.

Even after only a half-decade after adoption, the results have been impressive: the rapid rise of a middle class that largely ignores caste boundaries, an economy stabilizing at a new and much higher level, and the eviction from office of the corrupt remnants of political ideals gone sour. From the overseas investor’s point of view, India has emerged as the most promising mass market in Asia, surpassing China’s in sophistication, openness, internationalism, and transparency. India’s institutional structure and national psychology is based on political and economic freedom tempered with more limited social mobility.

The country has an uninhibited press, a judiciary that can (and often does) overrule the administration, a modern if slow legal system, international standards of accounting, and a strong research and academic infrastructure. India’s itchily competitive private sector is the backbone of its economy. Private business is 75 percent of the GDP. There is considerable opportunity for partnerships, joint, and share-based ventures, although sole proprietorships owned by foreigners are presently more limited (Kozul-Wright and Rowthorn, 1998). India’s economic future transcends the parochialisms of the country’s political parties.

So separate are business and politics that Indians see little conflict when its communist parties invest surplus funds in the shares markets. In 1991, India inaugurated a wide-ranging program of economic reform. Significant changes were made in the conduct of trade, industry, foreign investment, finance, and taxation, while more modest changes were applied to the public sector. Their goals were macroeconomic stability, higher domestic savings and investment, a stronger private sector and capital market, more diversified industry, and agricultural self-sufficiency.

Regulation of investment and production was considerably relaxed (Douglas Bullis 1997: 3). Today, private enterprise is encouraged in all but a few industries. The largest infrastructure industries such as the posts, road, rails, and ports are still government-administered, yet even there a phased program of public-sector divestment and restructuring is underway. Telecommunications are already liberalized. Foreign investment is considered equal to—and as welcome as—domestic investment. Import barriers have dropped radically and are in line for yet more cuts.

Capital markets freely court foreign investments, and get it. Banking controls have been eased. Private investment—supported by India’s personal savings average of 22 percent of the GDP (1996)—is strongly encouraged. Much of it finds its way into capital markets via shares acquisition and unit trusts. The tax structure has been simplified and its rates reduced. The Indian rupee is convertible in both current and capital accounts. India is the fifth largest economy in the world. On the leveled playing field of purchasing power parity (PPP), India’s economy is the second largest among the developing economies.

In November 1996, the GDP (PPP) was $1. 294 trillion, or $1,385 per person for the populace of 934 million. The economy averaged 4. 2 percent annual growth between 1982 and 1991, and 5. 8 percent after 1991. Inflation fluctuated between 8 and 13 percent over the same period. As of late 1996, foreign exchange reserves were a comfortable $18 billion, the foreign debt $85. 2 billion, and the current account balance was minus $5. 1 billion, or 7 percent of the GDP (Douglas Bullis 1997: 3).

Their success signaled a sea change in thinking that is unlikely to be shunted aside by parochial political issues. On the other hand, India has a long way to go, as anyone who arrives in Mumbai’s dirty, crowded, service-poor, everyone-for-oneself airport will attest. The government has to juggle two basic economic philosophies: • Progress between 1991 and 1996 has been remarkable and has clearly shown that the wave of the future is the continuance of market reforms, even if it means serious medium-term social unrest as the inefficient public sector is converted to private enterprise. Too much private enterprise will exacerbate India’s already serious rich/poor disparities, leaving the poor with no social safety net and turning them into a huge and chaotic political force (Douglas Bullis 1997: 3). Both of these have merit, and the second issue is often too much minimized by free-marketers who have not lived in India and do not realize how deeply rooted is the value system of everyone being taken care of. India still lives with a strong legacy of castes, tribes, clans, and families, all of which have strong inbuilt social protections.

Democracy has shifted the responsibility for fulfilling these expectations to politicians, who transfer the burden to government, which all too often shifts it to debt. Conclusion The evolution of the international economy during throughout twenty first century has been largely a response to the changes that have occurred in the political, economic and technological environment within which economic relations between countries are conducted. The record demonstrates the slow but inexorable movement among the regions of the world economy towards greater integration.

As a result of a number of developments, international trade increased dramatically in the second half of the nineteenth century, outstripping the growth of world output. Growth of several newly-industrializng countries in Asia and elsewhere, including Korea, Hong Kong, Taiwan and Singapore (the ‘four tigers’), Brazil, Argentina, Mexico, Israel, Spain, Greece and Portugal, to name but a few. Export-oriented growth strategies produced high rates of growth in most of these countries, but especially in the four tigers. By the early 1980s they had emerged as the coming industrial countries.

In addition, within the already industrialized world, another phase of fundamental change was developing. The world economy has changed its character significantly during the years since 1975 and will continue to do so, producing new trade and commercial patterns, and new commercially-powerful nations. It is claimed that the pace of globalization in the world economy quickened considerably after the mid-1980s, with world trade rising almost twice as fast as world output, following the rapid liberalization of financial markets in many countries, and the acceleration of capital flows to many newly industrializing countries.

This trend resulted in the speedy movement of some Asian countries into a higher group, while others, such as Malaysia, Thailand and China began to follow the Asian export-oriented path to their industrialization. International economic integration will not be complete, however, while regionalism persists in Europe, where the Single European Market, the Maastricht monetary union, and the continued growth of membership of the European Union work against the efforts of more ‘international’ institutions such as the WTO and the IMF.

Not until political union occurs in Europe, and the regional institutions established there become purely ‘national’ in character so that a ‘United States of Europe’ nation takes its place in the world economy, can the WTO and IMF operate as they are expected to and the rest of the world treat the European region in the same way as it treats the United States of America.

The next phase of world economic growth will witness an increasing concern about such issues as world population growth and its implication for food production, and a possible growing scarcity of certain raw materials and energy resources when manufacturing production again rises rapidly.

Environmental issues may also impinge more heavily on world economic growth in the future than they have done in the past. Perhaps above all, even if it is not apparent at the present time, advanced countries will be more concerned in the next few decades than hitherto with the raising of the living standards of an even greater proportion of the world’s population.

Although the trade advantages evident in recent decades have accrued largely to the industrial countries, this group includes some new members, and the case for international specialization remains as strong today as it was in the nineteenth century, while the indirect benefits that international trade can bestow upon today’s developing nations exceed, both in size and variety, those which could have been expected a century ago.

The number of industrialized countries is greater, the existing technology is far more advanced and diversified, and the opportunities for the international exchange of ideas and methods far more abundant today than they were 100 or even 60 years ago.

Whether it will be possible, through more intergovernmental co-operation and a greater awareness of the need for more positive action on the part of the richer nations to ensure that the benefits of modern technology are more fully shared by the developing countries, remains one of the most challenging problems of the new millennium, and one that must be addressed if the advanced nations are to pay more than lip service to their newly-discovered globalization process.